Gannett’s GCI first-quarter results were roughly in line with expectations. However, many analysts remain pessimistic regarding Gannett’s long-term prospects, since the firm remains highly dependent on the publishing business, which represents roughly 70% of total revenue and around half of operating income. Because of the growth of free online news content, barriers to entry in the news market have precipitously declined, and we believe this will prevent the publishing segment from returning to positive growth.

First quarter revenue increased 1.6% to $1.24 billion over the prior-year period, as growth in the broadcasting (up 8.5%) and digital (up 3.9%) segments offset flattish publishing results (down 0.3%). Management continues to focus on growing its paid digital subscriber base, and saw some return from these initiatives, as circulation revenue grew 8.6%. Still, circulation represents less than a third of publishing revenue, and weakness persists in publishing advertising, down 4.5% for the quarter.

In addition, it is uncertain how much shuffling there is between print and digital subscribers, and we expect the benefits will tail off over the next few years. While pay walls at its regional papers are a decent way to improve circulation numbers as the online content is complementary with a print subscription, this move could also accelerate publishing advertising revenue declines. The broadcasting segment remained a bright spot for the firm, though, and generated over half of the company’s operating profit, due to decent advertising revenue growth (up 2.3%) and an impressive increase in re-transmission fees (up 59% to roughly $37 million). Adjusted for noncash charges, the first-quarter non-GAAP operating margin remained roughly flat at 13%. Over time, we believe only top-line gains will boost margins, as we believe efficiency efforts, facility consolidations, and workforce reductions have mostly run their course.

Analysts are skeptical of Gannett’s targets, which include overall annual revenue growth of 2%-4% by 2015 due to low-singledigit revenue growth in publishing, low-double-digit growth in digital, and mid-single-digit growth in broadcasting. Over time, we expect low-single-digit growth in publishing to offset low- to mid-single-digit growth in broadcasting and digital, leading to flat overall growth. Still, we’re cognizant of its strong underlying cash flow generation, which makes the stock difficult to short at current levels. Currently, Gannett does not need to reinvest in its publishing business, allowing it to generate substantial free cash flow. In the near term, we expect this cash to continue to flow toward shareholders through dividends and share repurchases.